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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 000-29226
VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 43RD STREET
WHEELING, WEST VIRGINIA 26003
(Address of principal executive offices)
(304) 232-1541
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___x____ No ________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 11, 2000
----- --------------------------------
Common stock, $0.001 par value 9,347,584
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VALLEY NATIONAL GASES INCORPORATED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 1998 and 1999 5
Condensed Consolidated Statements of Operations for the
Six Months Ended December 31, 1998 and 1999 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
A S S E T S
----------- June 30, December 31,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 224,708 $ 576,310
Accounts receivable, net of allowance for doubtful accounts of
$454,981 and $589,423, respectively
11,960,059 15,004,786
Inventory 11,173,995 12,344,816
Prepaids and other 1,965,966 1,200,535
------------- -------------
Total current assets 25,324,728 29,126,447
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 49,786 82,786
Buildings and improvements 4,413,900 4,797,685
Equipment 56,906,554 64,221,263
Transportation equipment 10,172,945 11,451,899
Furniture and fixtures 4,102,422 4,407,523
------------- -------------
Total property, plant and equipment 75,645,607 84,961,156
Accumulated depreciation (29,857,130) (32,035,042)
------------- -------------
Net property, plant and equipment 45,788,477 52,926,114
------------- -------------
OTHER ASSETS:
Intangibles, net of amortization of $10,268,270 and $12,372,686,
respectively 35,773,717 45,607,067
Deposits and other assets 1,638,801 1,616,044
------------- -------------
Total other assets 37,412,518 47,223,111
------------- -------------
TOTAL ASSETS $ 108,525,723 $ 129,275,672
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
------------------------------------ 1999 1999
------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,294,130 $ 7,386,591
Bank overdraft -- 2,062,667
Accounts payable, trade 4,418,974 3,585,607
Accrued compensation and employee benefits 3,198,918 2,178,835
Other current liabilities 1,799,297 2,691,101
------------- -------------
Total current liabilities 15,711,319 17,904,801
LONG-TERM DEBT, less current maturities 56,242,003 71,694,883
DEFERRED TAX LIABILITY 7,864,661 9,240,899
OTHER LONG-TERM LIABILITIES 1,663,096 1,800,770
------------- -------------
Total liabilities 81,481,079 100,641,353
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,620,084 shares 9,620 9,620
Paid-in-capital 19,269,338 19,269,338
Retained earnings 10,029,114 11,618,789
Treasury stock at cost, 272,500 shares (2,263,428) (2,263,428)
------------- -------------
Total stockholders' equity 27,044,644 28,634,319
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 108,525,723 $ 129,275,672
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
NET SALES $24,616,796 $30,380,990
COST OF PRODUCTS SOLD, excluding depreciation and amortization
11,203,721 14,916,617
----------- -----------
Gross profit 13,413,075 15,464,373
----------- -----------
EXPENSES:
Operating and administrative 9,085,593 10,443,269
Depreciation and amortization 2,005,169 2,234,538
----------- -----------
Total expenses 11,090,762 12,677,807
----------- -----------
Income from operations 2,322,313 2,786,566
Interest expense 969,142 1,178,950
OTHER INCOME (EXPENSE) NET 50,676 102,211
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,403,847 1,709,827
PROVISION FOR INCOME TAXES 575,577 774,901
----------- -----------
NET EARNINGS 828,270 934,926
=========== ===========
ACCRETION OF REDEEMABLE COMMON STOCK 95,825 _____
----------- -----------
NET EARNINGS AVAILABLE FOR COMMON STOCK $ 732,445 $ 934,926
=========== ===========
BASIC EARNINGS PER SHARE $ 0.08 $ 0.10
DILUTED EARNINGS PER SHARE 0.08 0.10
WEIGHTED AVERAGE SHARES:
Basic 9,618,985 9,347,584
Diluted 9,618,985 9,347,584
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
NET SALES $47,825,713 $56,828,067
COST OF PRODUCTS SOLD, excluding depreciation and amortization
21,473,769 27,496,038
----------- -----------
Gross profit 26,351,944 29,332,029
----------- -----------
EXPENSES:
Operating and administrative 17,738,088 19,962,912
Depreciation and amortization 3,977,831 4,412,861
----------- -----------
Total expenses 21,715,919 24,375,773
----------- -----------
Income from operations 4,636,025 4,956,256
Interest expense 1,938,030 2,295,908
OTHER INCOME (EXPENSE) NET 131,016 178,357
----------- -----------
EARNINGS BEFORE INCOME TAXES 2,829,011 2,838,705
PROVISION FOR INCOME TAXES 1,159,895 1,249,030
----------- -----------
NET EARNINGS 1,669,116 1,589,675
=========== ===========
ACCRETION OF REDEEMABLE COMMON STOCK 95,825 ______
----------- -----------
NET EARNINGS AVAILABLE FOR COMMON STOCK $ 1,573,291 $ 1,589,675
=========== ===========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.17
DILUTED EARNINGS PER SHARE 0.16 0.17
WEIGHTED AVERAGE SHARES 9,619,535 9,347,584
DILUTED AVERAGE SHARES 9,619,535 9,347,584
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 3,887,010 $ 3,703,461
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets -- 18,879
Purchases of property and equipment (3,092,055) (2,815,076)
Business acquisitions, net of cash acquired (1,806,626) (9,711,214)
------------ ------------
Net cash used by investing activities
(4,898,681) (12,507,411)
Cash flows from financing activities:
Proceeds from borrowings 7,863,901 16,642,189
Principal payments on loans (7,074,878) (7,486,637)
Purchase of treasury shares (256,250) --
------------ ------------
Net cash provided by
financing activities 532,773 9,155,552
------------ ------------
Net change in cash and cash equivalents (478,898) 351,602
Cash and cash equivalents, beginning of period 589,170 224,708
------------ ------------
Cash and cash equivalents, end of period $ 110,272 $ 576,310
============ ============
Supplemental cash flow information:
Cash payments for interest $ 1,241,550 $ 2,171,338
============ ============
Cash payments for income taxes $ 968,084 $ 875,615
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Valley National Gases Incorporated (the Company)
presented herein are unaudited. Certain information and footnote disclosures
normally prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation have been made, interim periods are not necessarily indicative
of the financial results of operations for a full year. As such, these financial
statements should be read in conjunction with the financial statements and notes
thereto included or incorporated by reference in the Company's audited financial
statements for the period ending June 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Hardgoods $ 9,753,794 $11,789,224
Gases 1,420,201 555,592
----------- -----------
$11,173,995 $12,344,816
=========== ===========
</TABLE>
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful lives of the related assets.
Effective July 1, 1998, the Company changed its estimate of the useful lives
of its cylinders and tanks from 12 to 30 years. This change was made to better
reflect the estimated periods during which these assets will remain in service.
The Company changed the estimated useful life of cylinders as a result of
thorough studies and analyses. The studies considered technological advances in
cylinders, empirical data obtained from cylinder manufacturers and other
industry experts and experience gained from the Company's maintenance of a
cylinder population of approximately 400,000 cylinders.
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
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During the six months ended December 31, 1999, the Company purchased four
businesses. The largest of these acquisitions and the effective date was Lee's
Gas Supply, Inc. (December 1999).
In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed were as follows:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999
-----------
(Unaudited)
<S> <C>
Cash paid $ 9,816,036
Notes issued to sellers 2,000,000
Notes payable and capital leases assumed 2,239,789
Other liabilities assumed and acquisition costs 3,150,000
-----------
Total purchase price allocated to assets acquired $17,205,825
===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revolving note, interest at LIBOR plus 1.875% payable monthly through January
2001. Secured by the assets of the Company $ 36,756,726 $ 51,793,753
Term note, interest at LIBOR plus 1.875% payable monthly through October 2003
Secured by the assets of the Company 10,872,905 9,593,735
Note payable, interest at 6.6% payable annually through October 2003. Secured by
certain assets of the Company 3,415,372 2,732,298
Individuals and corporations, mortgages and notes, interest at 3.7% to 10.00%,
payable at various dates through 2010 11,648,116 15,107,354
------------ ------------
62,693,119 79,227,140
Original issue discount (156,986) (145,666)
Current maturities (6,294,130) (7,386,591)
------------ ------------
Total long-term debt $ 56,242,003 $ 71,694,883
============ ============
</TABLE>
Prime rate was 8.50% and LIBOR was 6.50% at December 31, 1999.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The new scheduled maturity date of the revolving note is January 16, 2001.
The Company pays a fee for the unused portion of the revolving loan. The
revolving loan is used primarily to fund acquisitions. The Company is not
required to make principal
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payments on outstanding balances of the revolving loan as long as certain
covenants are satisfied. Interest is charged on both the term loan and the
revolving loan at either the lender's prime rate or various LIBOR rates, at the
Company's discretion, plus an applicable spread. The weighted average interest
rate for substantially all of the borrowings under the credit facility was 8.4%
as of December 31, 1999. As of December 31, 1999, availability under the
revolving loan was approximately $13.4 million, with outstanding borrowings of
approximately $51.8 million and outstanding letters of credit of approximately
$10.1 million. The credit facility is secured by all of the Company's assets.
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. The
Company is in compliance with these covenants and believes that it will continue
to be in compliance through at least the next twelve months.
5. EARNINGS PER SHARE
Basic earnings per share were computed based on the weighted average number
of common shares issued and outstanding during the relevant periods. Diluted
earnings per common share were computed based on the weighted average number of
common shares issued and outstanding plus additional shares assumed to be
outstanding to reflect the dilutive effect of common stock equivalents using the
treasury stock method.
Options to purchase 232,400 shares of common stock were outstanding during
the six months and quarter ended December 31, 1999, but were not included in the
computation of diluted earnings per common share as the options' exercise price
was greater than the average market price of the common stock for the period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings available for common stock $ 732,445 $ 934,926 $ 1,573,291 $ 1,589,675
========== =========== ============ ===========
Basic earnings per common share:
Weighted average common shares 9,618,985 9,347,584 9,619,535 9,347,584
========== =========== ============ ===========
Basic earnings per common share $ 0.08 $ 0.10 $ 0.16 $ 0.17
========== =========== ============ ===========
Diluted earnings per common share:
Weighted average common shares 9,618,985 9,347,584 9,619,535 9,347,584
Shares issuable from assumed conversion of common
stock equivalents -- -- -- --
---------- ----------- ------------ -----------
Weighted average common and common equivalent shares 9,618,985 9,347,584 9,619,535 9,347,584
========== =========== ============ ===========
Diluted earnings per common share $ 0.08 $ 0.10 $ 0.16 $ 0.17
========== =========== ============ ===========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the Financial Statements and the Notes thereto.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical and
specialty gases, welding equipment and supplies, and propane in eleven states in
the mid-Atlantic and midwestern regions of the United States. The Company's net
sales have grown, primarily as a result of acquisitions, at a compound annual
rate of approximately 17% per year since the Company started business in 1958,
increasing from $190,000 in that year to $111.3 million for the last twelve
months. In fiscal 1999, gases accounted for approximately 40% of net sales,
welding equipment and supplies accounted for approximately 45% of net sales, and
cylinder and tank rental accounted for approximately 15% of net sales.
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 45 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions may
have, a dilutive effect upon the Company's income from operations and net income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows justify
payment of amounts in excess of the book or market value of the assets acquired,
resulting in goodwill being recorded.
The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters. Seasonality of total
sales has increased as propane sales as a percentage of total sales have
increased.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a quarter-
to-quarter basis. The Company believes that changes in these expenses as a
percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the seasonality of sales mentioned above and the
generally fixed nature of these expenses.
Historically, the Company's gross profit margins as a percentage of sales
have been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales, in some cases, has decreased in comparison to
prior years. Future acquisitions may affect this pattern depending upon the
product mix of the acquired businesses.
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RESULTS OF OPERATIONS
Comparison of Three Months Ended December 31, 1999 and 1998
Net sales increased 23.4%, or $5.8 million, to $30.4 million from $24.6
million for the three months ended December 31, 1999 and 1998, respectively.
Acquisitions made during the preceding twelve months contributed $3.3 million of
the increase in net sales, while same store sales increased $2.5 million. Same
store sales increased 10.1% versus the same quarter last year. Gases and
cylinder revenue represented 56.7% of net sales for the three months ended
December 31, 1999, with hard goods representing 43.3%. In comparison, net sales
for the three months ended December 31 1998 reflected gases and cylinder revenue
as 57.0% and hard goods as 43.0%.
Gross profit, which excludes depreciation and amortization, increased 15.3%,
or $2.0 million, to $15.5 million from $13.5 million for the three months ended
December 31, 1999 and 1998, respectively. This change is attributable,
primarily, to the effect of acquisitions made during the past twelve months.
Gross profit as a percentage of net sales was 50.9% for the three months ended
December 31, 1999, compared to 54.5% for the three months ended December 31,
1998. This reflects increased sales for lower margin equipment and consumables
and higher product cost relating to propane, partially offset by modest
improvements in other gas margins and cylinder rent. Propane costs for the
second quarter were 53% higher than the same period last year while related
sales prices increased 19% for the same period.
Operating and administrative expenses increased 14.9%, or $1.3 million, to
$10.4 million from $9.1 million for the three months ended December 31, 1999 and
1998, respectively. Of this increase, $1.1 million was related to acquired
businesses while base business increased $0.2 million. Operating and
administrative expenses as a percentage of sales was 34.4% for the three months
ended December 31, 1999, as compared to 36.9% for the same quarter in 1998,
reflecting the effect of leveraging acquisitions made during the last twelve
months and the Company's cost containment efforts.
Depreciation and amortization expense increased $0.2 million for the three
months ended December 31, 1999 compared to the same period in 1998, reflecting
the increase from acquisitions made during the last twelve months.
Interest expense increased $0.2 million for the quarter, reflecting the
financing of acquisitions made during the last twelve months.
Net earnings increased 12.9% to $0.9 million for the three months ended
December 31, 1999 compared to $0.8 million for the prior year quarter.
Comparison of Six Months Ended December 31, 1999 and 1998
Net sales increased 18.8%, or $9.0 million, to $56.8 million from $47.8
million for the six months ended December 31, 1999 and 1998, respectively.
Acquisitions made during the preceding twelve months contributed $5.3 million of
the increase in net sales, while same store sales increased $3.7 million. Same
store sales increased 7.8% versus the same period last year reflecting increased
propane sales, a partial recovery in steel related markets and our efforts to
improve service to our customers. Gases and cylinder revenue represented 54.8%
of net sales for the six months ended December 31, 1999, with hard goods
representing 45.2%. In comparison, net sales for the six months ended December
31, 1998 reflected gases and cylinder revenue as 55.6% and hard goods as 44.4%.
This change in sales mix reflects the effect of acquisitions made during the
preceding twelve months and the before mentioned factors that affected same
store sales.
Gross profit, which excludes depreciation and amortization, increased 11.3%,
or $3.0 million, to $29.3 million from $26.3 million for the six months ended
December 31, 1999 and 1998, respectively. Acquisitions made during the
preceding twelve
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months contributed $2.7 million of the increase in gross profit, while the gross
profit in the base business increased $0.3 million. Gross profit as a percentage
of net sales was 51.6% for the six months ended December 31, 1999, compared to
55.1% for the six months ended December 31, 1998. This change reflected an
increase in the proportion of gas and cylinder rent sales, which have a higher
gross profit margin as a percentage of net sales than hardgoods.
Operating and administrative expenses increased 12.5%, or $2.2 million, to
$20.0 million from $17.8 million for the six months ended December 31, 1999 and
1998, respectively. Of this increase, $1.8 million was related to acquired
businesses and the remaining $0.4 million reflected increases on a same store
basis. Operating and administrative expenses as a percentage of sales was 35.1%
for the six months ended December 31, 1999, as compared to 37.1% for the same
period in 1998, reflecting the addition of operating expenses related to
acquired businesses as a percentage of sales offset by the effect of the decline
in the same store sales.
Depreciation and amortization expense increased $0.4 million for the six
months ended December 31, 1999 compared to the same period in 1998, reflecting
the increase from acquisitions made during the last twelve months.
Interest expense increased $0.4 million for the six months, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates.
Net earnings remained consistent at $1.6 million for the six months ended
December 31, 1999 compared to $1.6 million, after accretion of redeemable common
stock, for the same period last year.
YEAR 2000 COMPLIANCE
Our Year 2000 compliance efforts were completed and we have experienced no
problems to date with our internal automated systems as a result of Year 2000.
In or before 1999, many of our critical suppliers and vendors indicated that
they were, or would be, Year 2000 compliant during 1999. We have not
experienced, and are not aware of, any Year 2000 problems affecting our critical
suppliers and vendors. We cannot guarantee that our efforts will prevent a
material adverse impact on our results of operations, financial condition or
cash flow that might result from the failure of any key third party systems to
accommodate the Year 2000 problem. We believe our efforts to address the Year
2000 issue will minimize possible negative consequences to Valley National
Gases, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital expenditures
and debt service with funds provided from operating activities. Acquisitions
have been financed by a combination of seller financing, bank borrowings and
funds generated from operations.
At December 31, 1999, the Company had working capital of approximately $11.2
million. Funds provided by operations for the six months ended December 31, 1999
were approximately $3.7 million. Funds used for investing activities were
approximately $12.5 million for the six months ended December 31, 1999,
consisting primarily of capital spending and financing for acquisitions. Sources
of funds from financing activities for the six months ended December 31, 1999
were approximately $9.2 million from net borrowings. The Company's cash balance
increased $0.4 million during the six months to $0.6 million.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million.
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<PAGE> 14
The new scheduled maturity date of the term note is October 4, 2003. The new
scheduled maturity date of the revolving note is January 16, 2001. The Company
is currently working with its bank to extend the maturity of the revolver and
expects to be completed with this effort by March 31, 2000. The Company pays a
fee for the unused portion of the revolving loan. The revolving loan is used
primarily to fund acquisitions. The Company is not required to make principal
payments on outstanding balances of the revolving loan as long as certain
covenants are satisfied. Interest is charged on both the term loan and the
revolving loan at either the lender's prime rate or various LIBOR rates, at the
Company's discretion, plus an applicable spread. The weighted average interest
rate for substantially all of the borrowings under the credit facility was 8.4%
as of December 31, 1999. As of December 31, 1999, availability under the
revolving loan was approximately $13.4 million, with outstanding borrowings of
approximately $51.8 million and outstanding letters of credit of approximately
$10.1 million. The credit facility is secured by all of the Company's assets.
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. The
Company is in compliance with these covenants and believes that it will continue
to be in compliance through at least the next twelve months.
The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from 3.7%
to 10.0% per annum, and maturities through 2010. The outstanding balance of
these notes as of December 31, 1999 was $17.8 million. Some of these notes are
secured by assets related to the applicable acquisition, some are unsecured, and
some are backed by bank letters of credit issued under the Company's credit
facility.
On December 23, 1997, the Company entered into two interest rate swap
agreements with Bank One to reduce the impact of changes in interest rates. The
first agreement was for a period of seven years, cancelable by the bank at the
end of five years, whereby the Company agreed to pay the bank a fixed rate of
5.90% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The second agreement was for a period of five years, cancelable by the bank at
the end of three years, whereby the Company agreed to pay the bank a fixed rate
of 5.80% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
On January 15, 1998, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby, the Company agreed to pay the bank a fixed rate of 5.43%
per annum on the notional principal amount of $10.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. The
second agreement was for a period of five years, cancelable by the bank at the
end of three years, whereby, the Company agreed to pay the bank a fixed rate of
5.29% per annum on the notional principal amount of $10.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
On August 28, 1998, the Company entered into an interest rate swap agreement
with Bank One to reduce the impact of changes in interest rates. This agreement
was for a period of five years, cancelable by the bank at the end of three
years, whereby, the Company agreed to pay the bank a fixed rate of 5.40% per
annum on the notional principal amount of $5.0 million and the bank agreed to
pay the Company the one month LIBOR rate on the same notional amount. The
Company is exposed to credit loss in the event of nonperformance by the bank.
However, the Company does not anticipate nonperformance by the bank.
The Company has entered into a put/call option agreement with an independent
distributor for the purchase of its business. This option becomes exercisable
beginning in the year 2002 and ending in the year 2008. The Company believes
that it
- 14 -
<PAGE> 15
will have adequate capital resources available to fund this acquisition at such
time that the option is exercised.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its second
and third quarters as a result of seasonal sales of propane, with corresponding
lower sales for the first and fourth quarters. As a result, income from
operations and net income typically are higher for the second and third quarters
than for the first and fourth quarters of the fiscal year.
INFLATION
The impact of inflation on the Company's operating results has been moderate
in recent years, reflecting generally low rates of inflation in the economy and
the Company's historical ability to pass purchase price increases to its
customers in the form of sales price increases. While inflation has not had, and
the Company does not expect that it will have, a material impact upon operating
results, there is no assurance that the Company's business will not be affected
by inflation in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
In June 1999, the FASB issued Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of SFAS No 133." Both statements are effective for years
beginning after June 15, 2000.
The Company has not yet quantified the impact of adopting Statement 133 on
our financial statements. However, the Statement could increase volatility in
earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Registrant on Form 10-K for
the year ended June 30, 1999. Reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1999.
There was no change to the composition of the Company's fixed and variable
rate long term debt or interest rate swaps during the six months ended December
31, 1999. As of December 31, 1999 the Company's average pay rate for these swaps
was 5.51% compared to its average receive rate of 5.95%.
- 15 -
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held
on October 26, 1999 at 9:00 a.m., local time, at the McLure House, 1200 Market
Street, Wheeling, West Virginia. The Annual Meeting was held for the purpose of
(a) electing three members of the Board of Directors to serve until the 2002
Annual Meeting and until their successors are elected, and (b) transacting such
other business as may properly come before the Annual Meeting. The matter below
was voted upon and approved:
Proposal No. 1 - Election of Directors:
The following persons were duly elected to the Board by the stockholders for
a term ending in 2002 and until their successors are elected and qualified:
<TABLE>
<CAPTION>
NOMINATION VOTES FOR VOTES ABSTAINED
---------- --------- ---------------
<S> <C> <C>
Gary E. West 7,737,099 -0-
--------- ---
John R. Bushwack 7,737,099 -0-
--------- ---
James P. Hart 7,737,099 -0-
--------- ---
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See the Exhibit Index on page 19.
(b) Reports on Form 8-K:
No reports on Form 8-K were made during the quarter.
- 16 -
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY NATIONAL GASES INCORPORATED
February 11, 2000 /s/ Robert D. Scherich
-----------------------------------
Robert D. Scherich
Chief Financial Officer
- 17 -
<PAGE> 18
EXHIBIT INDEX
Exhibit Number Description
- -------------- -------------------------------------------------------------
3.1 Articles of Amendment of the Company, incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933, as amended, (File No.
333-19973)
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, (File No. 333-19973)
27.1 Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only)
- 18 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR VALLEY NATIONAL GASES INCORPORATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001030715
<NAME> VALLEY NATIONAL GASES INCORPORATED
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> OCT-01-1999 JUL-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 576,310 576,310
<SECURITIES> 0 0
<RECEIVABLES> 15,594,209 15,594,209
<ALLOWANCES> 589,423 589,423
<INVENTORY> 12,344,816 12,344,816
<CURRENT-ASSETS> 29,126,447 29,126,447
<PP&E> 84,961,156 84,961,156
<DEPRECIATION> 32,035,042 32,035,042
<TOTAL-ASSETS> 129,275,672 129,275,672
<CURRENT-LIABILITIES> 17,904,801 17,904,801
<BONDS> 71,694,883 71,694,883
0 0
0 0
<COMMON> 9,620 9,620
<OTHER-SE> 28,681,473 28,681,473
<TOTAL-LIABILITY-AND-EQUITY> 129,332,446 129,332,446
<SALES> 30,380,990 56,828,067
<TOTAL-REVENUES> 30,380,990 56,828,067
<CGS> 14,916,617 27,496,038
<TOTAL-COSTS> 14,916,617 27,496,038
<OTHER-EXPENSES> 12,677,807 24,375,773
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,178,950 2,295,908
<INCOME-PRETAX> 1,709,827 2,838,705
<INCOME-TAX> 774,901 1,249,030
<INCOME-CONTINUING> 934,926 1,589,675
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 934,926 1,589,675
<EPS-BASIC> 0.10 0.17
<EPS-DILUTED> 0.10 0.17
</TABLE>
